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16 July 2018

Moody’s: Sale of Bank of Cyprus UK is credit positive

Rating Agency, Moody’s, has described the sale of Bank of Cyprus subsidiary, Bank of Cyprus UK, as credit positive, noting that the sale would place Bank of Cyprus in a better position to focus on reducing its domestic high stock of problematic loans.

Bank of Cyprus announced last Tuesday it signed a binding agreement to sell Bank of Cyprus UK to Cyenergy Capital Limited, owned by a consortium of UK-based investors, a sale for a consideration of €117 million and a profit of €3 million. The sale is expected to increase Bank of Cyprus’ CET1 Capital by around 65 basis points to 12.65% as of March 2018, the agency said.

“The sale of UK operations amid Brexit uncertainty will allow Bank of Cyprus’ management to focus on tackling its domestic operations significant asset quality issues. The increased capital strengthens the bank’s balance sheet and increases the chances of a possible sale of problem loans, which management is exploring,” Moody’s said in its bi-weekly Credit Outlook.

Moody’s noted that Bank of Cyprus’ organic nonperforming exposures (NPEs) were down 45% to €8.35 billion as of March 2018 from a peak of €15.2 billion in March 2015, highlighting however that the bank’s NPEs to gross loans remains among the highest of Moody’s-rated banks and is a key credit challenge, while the stock of provisions against these troubled loans, at around 50%, is relatively low.

Due to the UK loan book’s better quality, Moody’s estimates that the bank’s pro forma NPE/gross loan ratio as of March 2018 will increase to 49.6% from the 44.9% reported in first-quarter 2018.

Nevertheless, the agency added, the bank maintains its target for the ratio’s decline to below 40% by year-end and below 25% over the next three years, excluding any possible accelerated risk-reduction transactions that the bank is currently exploring.

The sale of the UK operations continues its deleveraging trend since 2012, although the bank’s size will remain significant relative to Cyprus’ economy. The sale will reduce Bank of Cyprus’ total assets by around €2 billion to €21.4 billion, around 110% of the country’s GDP, Moody’s said.